Asked by
Abrar 5600011
on Oct 20, 2024
Verified
You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?
A) 10.4%
B) 9.57%
C) 7.45%
D) 8.78%
Effective EAR
The Effective Annual Rate is the actual return on an investment, taking into account the effect of compounding interest.
Par Value
The nominal or face value of a bond, stock, or coupon as stated by the issuer, which is often used to calculate interest payments.
Annual Coupon Payments
The fixed interest payments made by a bond issuer to the bondholders at regular intervals over the life of the bond.
- Achieve proficiency in understanding the concepts of yield to maturity (YTM) and yield to call (YTC), including the factors that influence them.
Verified Answer
SR
Learning Objectives
- Achieve proficiency in understanding the concepts of yield to maturity (YTM) and yield to call (YTC), including the factors that influence them.